THE Zurich Administrative Court recently ruled that a capital gains tax law in a canton was unconstitutional. However, this law would be changed to make it constitutional.

Switzerland does not have a centralised tax system. While some taxes are levied exclusively by federal authorities, others are levied by the cantons, the communes and the federal authorities concurrently with significant differences in the taxes levied and the rates payable. While there is no capital gains tax levied on sale of private property, a real estate capital gains (RECG) tax is applicable on sale of business properties or real estate transactions, which is levied at the regional or cantonal level. This means depending on the canton, capital gains from a business transaction are either taxed together with other business profits with a general corporate income tax or with the special real estate capital gains tax.

A problem arose when a large multinational company, tax resident in Zurich sold real estate, spread across different cantons, thereby earning substantial capital gains. The company included these gains together with other business profits and claimed operational losses. Tax authorities in Zurich canton refused to allow the deduction of operational losses from the real estate capital gain.

Upto 2006, a RECG tax could be imposed on sale of real estate regardless of operational losses. However, a federal court subsequently ruled that in the case of sale of property across various cantons, it was unconstitutional for a canton, where a RECG materialised, to impose a special RECG tax without accounting for operational losses from other cantons.

In spite of this precedent, the Zurich canton still refused to allow operational losses. Eventually, the Zurich Administrative Court ruled that the capital gains tax law was unconstitutional as it did not accept operational losses deducted from the basis of RECG tax.